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Tag Archives: marginal productivity of debt

How to Fix GDP, Report 14 Jul

Last week, we looked at the idea of a national balance sheet, as a better way to measure the economy than GDP (which is production + destruction). The national balance sheet would take into account both assets and liabilities. If we take on another $1,000,000 debt to buy a $1,000,000 asset, then we have not added any equity. This is so, even though assets have gone up. But unfortunately, as a consequence of assets going up, consumption goes up. This is the much-vaunted wealth effect. The...

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More Squeeze, Less Juice, Report 7 Jul

We have been writing on the flaws in GDP: that it is no measure of the economy, because it looks only at cash and not the balance sheet, and that there are positive feedback loops. “OK, Mr. Smarty Pants,” you’re thinking (yes, we know you’re thinking this), “if GDP is not a good measure of the economy, then what is?!” The National Balance Sheet In the first part of this series, we introduce some concepts from accounting: cash basis and balance sheet. This approach would logically suggest that...

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Debt and Profit in Russell 2000 Firms

This week, the Supply and Demand Report featured a graph of debt vs profitability in the Russell 2000. Here’s the graph again: This graph shows a theme that we, and practically no one else(!) have been discussing for years. It is the diminishing marginal utility of debt. In this case, more and more debt is required to add what looks like less and less profit (we don’t have the raw data, only the graphic). We do not view the coming end of this incredible false boom in biblical terms, nor in a...

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The Duality of Money, Report 10 Mar

This is a pair of photographs taken by Keith Weiner, for a high school project. It seemed a fitting picture for the dual nature of money, the dual nature of wood both as logs to be consumed and dimensional lumber to be used to construct buildings. Last week, in Is Capital Creation Beating Capital Consumption, we asked an important question which is not asked nearly often enough. Perhaps that’s because few even acknowledge that capital is being consumed, and fewer tie it to the falling...

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A Dire Warning, Report 29 July 2018

Let’s return to our ongoing series on the destruction of capital, and how to identify the signs. Steve Saville posted a thoughtful article this week entitled The “Productivity of Debt” Myth. His article provides a good opportunity to add some additional thoughts. We have written quite a lot on this topic. Indeed, we have a landing page for marginal productivity of debt (MPoD) with four articles so far. Few economists touch this topic, perhaps because MPoD shows that our monetary system is...

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